lancaster county project questions

8/14/2019 Lancaster County Project Questions

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QUESTIONS AND TOPICS FOR PSP, LCCCA AND RACL

The Board of Commissioners for Lancaster County requests that Penn SquarePartners (PSP), the Lancaster County Convention Center Authority (LCCCA) andthe Redevelopment Authority of the City of Lancaster (RACL) as a part of their

presentation of information to the Commissioners regarding the TIF Act application forthe combined convention center and hotel in downtown Lancaster address the followingquestions and topics.

The Commissioners may ask additional questions and raise additional topics asthey continue to analyze the TIF Act application and further information is provided tothem. The Commissioners have a responsibility to protect the interests of LancasterCounty taxpayers. In 2003, the County guaranteed one-half of a $40 million bond sale,which exposes taxpayers to a total potential liability in excess of $60 million.

Commissioner Shaub has not presented any of these questions. He believes the

information he needs to evaluate the TIF Act application has either already been providedor will be provided in the upcoming presentation to the Commissioners.

1. Timing of the TIF Application and Supporting Information

You explained that Interstate Hotels Group is working on updatedfinancial projections for the Convention Center and Hotel. We assumethis report will be a component of the economic feasibility studyrequired by the TIF Act.

Unfortunately, you do not expect to receive Interstates report until the

close of business on Friday, March 11. That means the CountyCommissioners, City Council and the School Board will receive the reportjust one business day Monday, March 14 before you expect the SchoolBoard to vote on the proposed TIF at its meeting March 15.

Given the importance of the economic feasibility study to theconsideration of this project by the Commissioners, City Council and theSchool Board, why is this information from Interstate being provided atsuch a late date?

Why did you not initiate the TIF process in mid-December 2004, at thesame time you decided to transfer ownership of the hotel property toRACL? Did you believe then that a for-profit hotel operation can avoidlocal real estate tax if the property is leased from RACL? What happenedsince mid-December 2004 to lead you to change your mind and proposethe TIF?


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2. 2003 County Guarantee of Financing

Exhibit 7 of the Project Plan identifies $40 million from the 2003 HotelTax Revenue Bonds as part of the LCCCAs contribution toward fundingof the Convention Center.

However, according to the Closing Statement from the 2003 bond sale(Tab 1), only $31,649,932 from the $40 million bond sale was placed intothe Construction Account generated by the bond sale, with the balance ofthe bond proceeds going to pay for closing costs and other accounts.

Why does Exhibit 7 show that $40 million from the bond sale is availablefor project funding, if the Closing Statement from the bond sale says thatonly $31,649,932 is available in the Construction Account?

Further, it appears that no money from the 2003 bond sale can be useddirectly to fund construction of the Convention Center.

Section 5.02(c) of the Trust Indenture between LCCCA andManufacturers and Traders Trust Company, dated December 15, 2003(Tab 2), states that no construction funds from the bond sale may bedisbursed until the initial $40 million bond is converted to $40 million intax-exempt bonds. Only the proceeds from the tax-exempt bond sale willbe available to fund construction costs.

Thus, the funds to be used for construction of the Convention Center willcome not from the proceeds of the initial 2003 bond sale, but rather from

the proceeds of the subsequent tax-exempt bond sale.

If the initial 2003 bond sale did not generate funds that could be used forconstruction of the Convention Center, why was it held?

According to the Closing Statement from the 2003 bond sale (Tab 1),there were $423,674 in closing costs associated with that sale.

Further, as reflected in both the Closing Statement (Tab 1) and Section5.02(a) of the Trust Indenture (Tab 2), $2,000,000 from the 2003 bondsale was set aside to pay for closing costs that will be associated with the

conversion of the 2003 bond sale to tax-exempt bonds, at the time fundsare actually needed for construction of the Convention Center.

Also, pursuant to Section 202(i) of the Trust Indenture (Tab 3), the amountof interest LCCCA is paying on the $40 million bond sale from 2003exceeds by .55% the amount of interest LCCCA is receiving oninvestments of its proceeds from that bond sale. This negative arbitrage


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situation appears to create an overall cost to LCCCA of approximately$220,000 a year.

The $423,674 in closing costs associated with the 2003 bond sale (most ofwhich will need to be repeated, and paid for out of the $2 million set aside

for closing costs on the future tax-exempt bond sale), plus the $220,000per year negative arbitrage costs associated with the 2003 bond sale(approximately $275,000 over 15 months since December 2003), totalapproximately $700,000 to date since the 2003 bond sale.

What was the purpose of spending this $700,000 in taxpayer money (plusadditional interest at $220,000 per year until the tax-exempt bonds aresold), if the funds from the 2003 bond sale could not be used to fundconstruction of the Convention Center?

Why not wait until construction funds are actually needed, and then

generate the funds necessary for construction of the Convention Centerthrough a traditional tax-exempt bond sale?

Why does PSPs website (Tab 4) say that the 2003 bond sale was tofinance construction of the Convention Center, when the bond saledocuments state that no money from that sale can be used for construction,and that funding of construction must await the sale of traditional tax-exempt bonds?

Was the reason for the 2003 bond sale to create a $40 million borrowingvehicle to which the then-existing Board of Commissioners could adhere

the Countys guarantee (as they did by a 2-1 vote), which guarantee is thentransferred under the documents to the tax-exempt bond whenconstruction funds are actually needed, all as a means to preclude theBoard of Commissioners at the time such funds are actually needed fromvoting on whether to have the County guarantee the $40 millionborrowing?

If so, were you aware it would cost $700,000 (and counting) of taxpayermoney to accomplish the goal of avoiding such a vote by a future Board ofCommissioners?

If so, why was this justification not explained publicly at the time of the2003 bond sale or at the time of the 2003 County guarantee? Why has thepublic explanation instead been that the 2003 bond sale will financeconstruction of the Convention Center, when the reality is such fundscannot be used for that purpose?

Page 2 of the Guaranty Agreement entered by the County in December2003 (Tab 5) provides that during the 40 year lifetime of the bond (unless


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it is refinanced earlier to tax-exempt bonds), the County will guarantee upto $1,506,960 per year. Multiplying 40 times that annual guaranteemaximum amount equals $60,278,400. Are County taxpayers thereforeexposed to a potential liability under the 2003 bond sale of $60,278,400?

3. Interaction of Hotel, Convention Center and Common Elements

The cost allocation provided to the Commissioners on March 2, 2005 (Tab6), states that the Convention Center will cost $68.7 million and the hotelwill cost $60.3 million. How much of those costs cover the commonelements to be shared by both facilities?

What is the square footage allocation between the Convention Center, thehotel and the common elements?

Please specify all arrangements or agreements between the Hotel (PSP)and Convention Center (LCCCA) regarding use of the common elementsand of each others facilities. If such details are not yet established, pleaseidentify whether such arrangements or agreements will be arms lengthtransactions or some other kind of transactions.

To the extent not already identified in the Project Plan, please identify (a)any payments made or anticipated to be made from LCCCA or RACL toPSP, and (b) any expenditures made by LCCCA or RACL that will benefitPSP or the hotel operation.

4. Convention Center

Page 8 of the Project Plan identifies three market feasibility studiesconcerning the Convention Center (two by Pricewaterhouse Coopers LLCin 2000 and 2003, and one by C.H. Johnson in 2003), and one additionalreport concerning parking by Cagley & Harman in 2003.

Given the changes in the convention industry since 2003, how muchreliance do you believe the Commissioners, City Council and the SchoolDistrict should place on these reports?

The initial Pricewaterhouse Coopers report from 2000 projected themarket demand for a downtown Lancaster convention center based inlarge part on written surveys completed by state and regional associations.

According to page 43 of the 2000 report (Tab 7), where an associationresponded to the survey indicating that it might possibly use adowntown Lancaster convention center, Pricewaterhouse Cooperscharacterized that response as indicating the association was a likelyuser of a Lancaster convention center. Then, in evaluating the market


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demand for the convention center, Pricewaterhouse Coopers relied heavilyon such likely users of the proposed facility.

Are you concerned that by characterizing an association which indicated itwould possibly use the convention center as a likely user of the

convention center, Pricewaterhouse Coopers may have overestimated themarket demand for the convention center?

Please provide copies of all completed surveys received byPricewaterhouse Coopers in its 2000 evaluation of the market demand fora downtown Lancaster convention center.

At page 31 of its 2003 report (Tab 8), Pricewaterhouse Coopersacknowledges that of the likely users of a downtown Lancasterconvention center from its 2000 survey (including those who had indicatedthey might possibly use the facility), only about 80% would consider

using the convention center.

If only 80% of the former likely users from 2000 remained willing toconsider using the facility in 2003, was that not an indication of decreasedmarket interest in the downtown Lancaster convention center?

Please provide copies of all completed surveys received byPricewaterhouse Coopers in its 2003 evaluation of the continuing marketdemand for a downtown Lancaster convention center.

The C.H. Johnson report from 2003 (Tab 9) provides absolutely no backupdata or analysis to support its projected usage of the convention center andrelated financial assumptions concerning operation of the conventioncenter.

Did you receive any backup data or analysis to accompany this report? Ifso, please provide it.

5. Hotel

Page 1 of the Project Plan describes the proposed hotel as a full servicehotel. Previously, project consultants had described the facility as a four-

star hotel (PricewaterhouseCoopers, Robert V. Canton, November 6,2000) (Tab 10), and an upscale, full-service hotel (Ernst & Young, LLP,April 28, 1999) (Tab 11).

Is the Marriot Hotel going to be designed and constructed to a four-staror upscale quality, so that it obtains a higher ranking in the hospitalityindustry than the five local competitive hotels identified in the 2005


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Smith Travel Report (Willow Valley, Best Western Eden Resort, HolidayInn Lancaster, Hampton Inn and Hilton Garden Inn)?

If not, what justifies your assumption that the Marriot Hotel will be able tocharge the premiums in average daily hotel rate you have projected, as

compared to the rates you have projected for the competitive hotels($130.50 as opposed to $117.40 in 2007, and $142.50 as opposed to$125.75 in 2009)?

If not, what justifies your assumption that at these premium rates, theoccupancy rate at the Marriot Hotel will equal the occupancy rate youproject for the competitive hotels (68% by 2009)?

Does your analysis take into account that parking at the competitivehotels is free, and parking at the Marriot Hotel will be for a fee? Doesntthe existence of a parking fee at the Marriot increase the effective daily

rate to patrons as compared to the daily rate at competitive hotels?Wont parking fee information be readily available and relied upon byconvention planners and the traveling public?

What was the basis for selecting the five competitive hotels from amongthose in the Lancaster market? Why is the Lancaster Host not included inyour competitive set of hotels?

Pages 24-25 of the HVS Market Study issued in 2003 (Tab 12), providethat in projecting demand for the hotel, HVS relied upon a recent studycommissioned by the LCCCA. However, the data relied upon is from the

PricewaterhouseCoopers 2000 report, which was three years old at thetime HVS relied upon such projections. In addition, the projections ofPricewaterhouseCoopers (as stated above) relied upon its characterizationof convention planners who might possibly use the downtown Lancasterconvention center as likely users of the facility.

Do you believe that such reliance on the 2000 PricewaterhouseCoopersstudy undermines the credibility of HVSs projection of hotel roomsattributable to Convention Center attendance?

HVS projects that total attendance of 10,000 at conventions and tradeshows hosted by the Convention Center will translate to 22,500 roomnights at the hotel, that total attendance of 70,000 at consumer showshosted by the Convention Center will translate to 18,750 room nights atthe hotel, and that total attendance of 24,000 at other events hosted by theConvention Center will translate to 3,900 room nights at the hotel, for atotal of 45,150 room nights at the hotel generated from the ConventionCenter.


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Can you provide statistical data from other combined convention centersand hotels to support your projected ratios between uses of the proposedconvention center and hotel room nights in Lancaster?

Do you dispute Heywood Sanders contention that currently in theindustry, the trend is approximately a 1-to-1 ratio of convention and tradeshow attendance to room nights, and that the ratio of room nights beinggenerated by consumer shows and other events is lower than yourprojections?

Please provide a copy of the lease for the hotel (or the latest draft versionof the proposed lease) between RACL and PSP that is referenced on page1 of the Project Plan.

6. Parking

Page 5 of the Project Plan states that the Lancaster City Parking Authoritywill lease a portion of the King Street garage to the LCCCA, and thatLCCCA and the Parking Authority will build a new parking garage with300 spaces to augment the King Street garage. What will be the cost tothe LCCCA and the Parking Authority, respectively, for this new parkinggarage?

How many spaces in the King Street garage will be leased to the LCCCA?The same number of new spaces being created in the new garage (300)?

The 2003 Cagley & Harman report states at page I-2 (Tab 13) that theConvention Center will create a total parking demand of 1058 spaces.Taking into account some parking availability outside of a parking garage,the Cagley & Harman report concludes that the parking structureservicing the LCCC should have a minimum capacity of 846 spaces.

If there are only 300 spaces available for the Convention Center at theKing Street garage, where are the additional 546 spaces that Cagley &Harman says are needed?

Do you believe the parking plan identified at page 5 of the Project Planreflects a feasible approach for the project?

Who is paying for the improvements to the King Street garage identifiedon page 5 of the Project Plan, and at what cost?

What is the projected parking cost for patrons of the Convention Centerand the Marriot? As asked earlier, wont the existence of a parking feeimpact the room rate and occupancy factors at the Marriot?


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Please provide copies of any agreements between the LCCCA and theParking Authority.

7. Project Costs

As required by the TIF Act, please provide a detailed list of all theestimated project costs that are shown on Exhibit 6 of the Project Plan.Also, please identify who prepared such detailed information, and when.

Do your current cost projections take into consideration cost escalationlikely to occur between now and the time contractors submit bids on theconstruction contracts? If the TIF is approved, when will bids besubmitted?

What happens to the project if the TIF is approved, but the constructionbids exceed the construction budget? What is the specific impact under

such circumstances to the Countys 2003 guarantee?

Regarding site acquisition costs of $5,290,000, who paid or owes thisamount, to whom, and for what site? As part of this, please include anypayments made or owed to PSP for the Convention Center site.

Please provide the most recent detailed estimate of hard costs projectedin the amount of $77,946,045, identifying when the estimate was preparedand by whom.

Regarding furniture, fixtures and equipment costs of $14,421,000, pleaseprovide a detailed list identifying what items are to be purchased, bywhom, at what projected cost, and who will retain ownership of suchitems.

Regarding professional fees and soft costs of $14,980,000, please providea detailed list identifying the nature of such costs and to whom they are tobe paid.

Please provide a detailed list of the projected financing costs of$11,768,844.

What is the purpose of the Reserve for Future Eligible Project Costaccount in the amount of $5,200,000?

8. Project Financing

Regarding the three state grants RACL has secured in the aggregateamount of $7,250,000 (page 10 of the Project Plan), have any expresslimitations been imposed on the use of those funds. If so, what limitations


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have been imposed, by whom and through what written document? Pleaseprovide copies of any such documents.

Has RACL received any of the funds from such grants? If so, how muchand when was the money received? If not, what is the funding source

from which RACL has loaned PSP $3.2 million, as indicated on page 10of the Project Plan?

With regard to the $3.2 million loan from RACL to PSP (page 10 of theProject Plan), please specify all uses of the loan proceeds and the amountof each use. What is the interest rate on the loan? Will the loan be repaidif the project does not go forward? Please provide a copy of the loanagreement.

Please identify the additional $12 million state grant RACL intents toseek, referred on page 10 of the Project Plan. What verbal or written

assurances have been made that such grant will be approved, and bywhom? Please provide a copy of any written assurances.

The annual state grant expected to support a $12 million bond offeringover 20-years (page 10 of the Project Plan) is subject to review by DCEDand the Pennsylvania Department of Revenue after three years. It will berenewed beyond three years only if you establish that the incrementalsales, uses & occupancy and personnel income taxes generated by theproject equal the amount of the grant paid during the first three years.

As depicted in the March 2003 Financial Projections provided by PSP, the

vast majority of the projected incremental taxes generated by the projectcome from sales and use tax paid at the Marriot Hotel. If the amount ofsuch incremental taxes attributable to the sales and use paid at the Marriotare substantially lower because your projected premium hotel rates andyour projected occupancy rate are not fulfilled, does that place at risk thereceipt of the state grant for the final 17 years of the 20-year grant?

If the state grant is terminated after 3 years because the projected sales anduse taxes paid at the Marriot Hotel do not materialize, what is the amountof potential liability to the City of Lancaster, which must guarantee thebonds?

Exhibit 7 of the Project Plan states that Penn Square Partners iscontributing $35.3 million of private sector funding toward the project.

However, this amount includes $10 million in TIF note payments, whichis money that but for the TIF would be paid in real estate taxes toLancaster County, the City of Lancaster and the School District ofLancaster. Because it is the three taxing authorities that would be


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agreeing to relinquish their right to $10 million in tax revenue, is it notmore accurate to portray this $10 million as a public sector contribution bythose three taxing authorities, rather than as a contribution by PSP?

Does PSP or any of its affiliates intend to seek federal income tax creditfor the $10 million in private investment? If so, and if such credit isprovided, to what extent will that likely reduce the true cost of suchinvestment?

Is PSPs financial risk in this project limited to its $10 million investment?If not, please explain any other financial risk to PSP?

Is PSPs $10 million contribution allocated to any specific purchase orcost?

Has PSP, LCCCA or RACL received any written assurance from legalcounsel that the $40 million bonds that ultimately will be issued to financeconstruction of the Convention Center will be entitled to tax-exempt statuspursuant to the Internal Revenue Code provisions distinguishing betweengovernmental issues and private activity bonds?

Will the bonds be a governmental issue or a private activity bond?

If the latter, will the bonds qualify for an exclusion of interest from federalincome tax pursuant to Section 141 of the Internal Revenue Code?

If the bonds do not qualify for tax-exempt status pursuant to the Internal

Revenue Code, what would be the ramifications on the project? On theCountys 2003 guarantee?

9. Operating Costs and Income

Please provide detailed line item lists of all projected operating costs andincome for both the convention center and hotel. Please identify whoprepared the lists and when they were prepared.

10. External Economic Impact

Page 2 of the Project Plan states that after construction is completed, theconvention center and hotel will generate up to 250 full-time equivalentpermanent jobs. In contrast, financial projection materials PSP providedthe Commissioners dated March 2005 state that the convention center andhotel will generate 207 full-time equivalent permanent jobs. Whichnumber should the Commissioners, City Council and the School Boardrely upon in evaluating the external economic impact of the project?


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What is the projected hourly wage rate for the service positionsanticipated for the hotel and convention center?

The allocation of project costs provided on March 2, 2005 (Tab 6)allocates $60.3 million to the construction of the hotel. At page 2 of the

Project Plan, you state that the assessed value of the hotel (which equatesto fair market value) immediately upon completion of construction will be$28.3 million.

What is the basis for your assertion that the fair market value of the hotelimmediately upon construction will be less than half of the constructioncost?

Please provide a copy of any appraisal you have received from aPennsylvania certified appraiser supporting this determination.

Based on current real estate tax rates for Lancaster County, the City ofLancaster and the School District of Lancaster, the totals mills of 30.582 isallocated 9.69% to the County (2.962 mills), 25.08% to the City (7.67mills) and 65.23% to the School District (19.950 mills).

Given these percentages, why does PSP offer the City a larger amount ofPSP Priority payments than it offers to the School District? (In theMarch 2005 financial projections provided by PSP, see the Summarypage for the 20 year period.)

Why does PSP offer no PSP Priority payments or PSP Participation

payments to the County?

Why are the PSP Priority payments and the PSP Participation payment notallocated among the three taxing authorities on a percentage basis that isconsistent with their respective millage rates?

Why is the City singled out for preferential treatment, and the Countysingled out to receive no additional payments whatsoever?

Does Exhibit 5 of the Project Plan reflect that if PSPs projections proveaccurate, the three taxing authorities over 20 years will have relinquished

over $7 million in tax revenues ($19,059,700 minus $12,019,800 =$7,039,900), all of which will become profit to PSP?

11. Miscellaneous

The Project Plan at page 1 identifies Penn Square Partners as aPennsylvania limited partnership consisting of Penn Square GeneralCorporation, Penn Square Limited, LLC, and Fulton Bank. There is no


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mention of Lancaster Newspapers, Inc., High Industries, Inc., or any oftheir affiliates.

Please identify the percentage ownership of Penn Square Partners, PennSquare General Corporation and Penn Square Limited, LLC.

Page 3 of the Project Plan states that LCCCA will enter a purchaseagreement with the condominium association for the Convention Center,but does not state that RACL will also enter a purchase agreement with thecondominium association for the hotel. Will RACL do so? Pleaseprovide copies of all such purchase agreements to the Commissioners.

Please provide copies of any agreements between the LCCCA and theHistoric Preservation Trust regarding the proposed interpretive museumreferenced at page 7 of the Project Plan.

Although the TIF Act requires the host municipality (City of Lancaster) tosponsor the TIF, it does not require the School District and the County toopt into the TIF. That is, from a legal standpoint, the TIF program ispermissible even if the School District or the County opts out ofparticipating in the TIF. Taxing authorities that opt out of the TIF wouldlevy real estate taxes based on future tax assessments, including anyincremental assessments attributable to the project.

Because the Countys share of real estate taxes is relatively low (currentlyless than 10% of the combined millage of all three taxing authorities),does the economic feasibility of the project fail if only the County opts out

of the TIF?

What do you believe are the five most significant concerns and risksassociated with this project?

What do you believe are the five most significant benefits that can beachieved with this project?

lancaster county project questions

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